The mother of all bailouts to come
Opinion/editorial by J.C. Watts Jr.

The Las Vegas Review-Journal

February 28, 2010 edition

I'm all for bipartisan agreements that make sense. However, when I look at what is unfolding in Congress in the name of bipartisanship on banking reform, it makes me extremely nervous.
Here we go again. Sens. Chris Dodd, D-Conn., and Bob Corker, R-Tenn., are working on bipartisan legislation to revamp the regulatory structure of the financial services industry. The House passed Rep. Barney Frank's version Dec. 11. The bill from Frank, D-Mass., would create a controversial Consumer Financial Protection Agency and codify a permanent bailout authority for the federal government.

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The big question for Americans who hate bailouts is whether the Senate will follow the House's lead and grant the Federal Reserve the statutory authority to bail out individuals, partnerships or corporations to the tune of $4 trillion.
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On Page 506 of the House-passed bill, which is titled the "Wall Street Reform and Consumer Protection Act" is the following language: The amounts made available under this subsection shall not exceed $4,000,000,000,000.
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This so-called "reform" and "consumer protection" legislation authorizes a $4 trillion bailout fund for Wall Street. That is more money than President Obama's 2011 budget ($3.8 trillion), the gross domestic product of Germany ($3.7 trillion), and between five and six times the amount of the Troubled Assets Relief Program. A majority of House members actually voted for a bill containing $4 trillion in new bailout authority. You just can't make this stuff up. It is really in the bill.

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David Reilly, a columnist for Bloomberg News, said the bill "authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for 'no-more-bailouts' talk. That is more than twice what the Federal Reserve pumped into markets last year. The size of the fund makes the deal-making in the Senate's health care bill look minuscule."
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Current law allows the Federal Reserve to open the lending window in "unusual and exigent circumstances." According to the Congressional Research Service, this authority had been used in the past to authorize entities created by the Federal Reserve's Bear Stearns merger and bailout of AIG. Nowhere near $4 trillion has been committed under existing authority.
An explicit authority would be created under the Frank approach to financial services reform to allow the Federal Reserve to make $4 trillion in commitments in unusual and exigent circumstances.
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This provides the Federal Reserve with more authority to bail out failing industries without the need for getting the prior consent of Congress. The words "unusual" and "exigent" are vague and ambiguous enough to give the Federal Reserve sweeping new bailout authorities to dispense massive commitments to private and public entities.
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Here's how it would work: The Fed would have to make a written determination that a "liquidity event exists that could destabilize the financial system" with a vote of two-thirds of the members of the Financial Oversight Council. The next step would be to secure the written consent of the secretary of the treasury as another condition to the commitment of monies, and the president would have to certify that an emergency exists. The Fed then would authorize a Federal Reserve bank to make a commitment in consideration for "notes, drafts, and bills of exchange" consistent with the order from the Fed, Treasury and the president. The House and Senate would be notified of the action by the Fed. There is a requirement that the secretary of the treasury believes that the funds will be paid back.
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I remind you these are all the same entities who were asleep at the wheel in oversight of Fannie Mae and Freddie Mac, allowing them to run amok. There is a provision for a joint resolution of congressional disapproval, but the commencing of any resolution would not happen until after the commitment of funds had already been made. It is unlikely that members of Congress would be able to unravel any action.

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The Senate has the power to run away from this new bailout authority or to embrace it when senators debate financial services reform legislation. The direction that Dodd and Corker take in negotiations on this important issue will have severe ramifications for government policy on the proper role of the Federal Reserve to prop up failing companies in times of crisis.

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If this bill passes the Senate with bailout authority intact and gets one step closer to the president's desk, then voters will be mad at yet another abuse of the taxpayers' dollars. The idea of a small and limited government is inconsistent with the idea that the Federal Reserve should have $4 trillion more in bailout authority.